Health Factor and Liquidation
What is Health Factor?
The Health Factor is a key parameter for SD Utilization and asset security. It is the numeric representation of the safety of utilized SD by node operators, ensuring the robust safeguarding and enhanced security of the SD Utility Pool. The higher the value, the safer the state of ETHx nodes is against a liquidation scenario.
Node operators need to ensure that the Health Factor for their node is always greater than 1. When the Health Factor for a node falls below 1, the node is liquidated (exited from the Beacon chain) to recover the Utilized SD by using the Node Operator's ETH deposit. In case node operators attempt to exit without settling their utilized $SD, a portion of their ETH deposit will be locked until they clear their utilization fees.
How is Health Factor calculated?
Health Factor = 35% of ETH collateral / Total accumulated SD Utilization fee
Utilization fee is the total fee accumulated on the utilized SD. Please note that this is just the fee and not the total SD amount that was utilized.
ETH collateral is the ETH deposited by the node operator to add validators to their node.
For robust safeguarding and enhanced asset security, we calculate the Health Factor based on a collateral value, which is half of the ETH deposit (e.g., for a node with one validator, we will consider a collateral value of 2 ETH, even though the node operators deposit 4 ETH.) Additionally, we consider a liquidation threshold of 70%. (Hence, 35% of ETH collateral)
What is Liquidation?
When the Health Factor for a node reaches or falls below 1, the node will be liquidated. This means that all the validators for that node are exited from the Beacon Chain to recover the utilized SD by using the Node Operator's ETH deposit.
Liquidation Conditions
A node can be liquidated when the Health Factor for a node reaches 1 or goes below 1.
During liquidation, the validators are exited from the beacon chain to recover utilized SD by using the Node Operator's ETH deposit
The Liquidator who liquidates this node, first pays the Utilization Fee on Node Operator's behalf, and the same amount is given back to the Liquidator with some premium using the 4ETH deposit of the Node Operator, i.e. the liquidator will be incentivized to call the liquidity function.
The amount of ETH left after closing the utilization position and paying the liquidation fee can be claimed by the node operator.
Liquidation Scenarios
Based on the Health Factor and validator status, there can be the following liquidation scenarios:
Scenario 1: Node operator exiting the node themselves
Assumption: The node operator is running 1 node - 1 validator. The SD collateral is completely utilized from the Utility Pool, and the Health factor is greater than 1.
In this scenario, after the node exit, the ETH deposit of the node operator will be locked. However, the entire 4ETH won’t be locked; the node operator can still withdraw some part of their ETH deposit from the claim vault until the Health Factor is above 1.
Note: The same logic will apply to a node operator with more than one validator. The greater the number of validators, the higher the collateral in the form of ETH deposit. The Health Factor will be calculated accordingly.
Scenario 2: An Edge Case for Scenario 1
Consider scenario 1, where initially the Health Factor was greater than 1, and the node operator exited the node. After the exit, the node operator started claiming ETH until the health factor was above 1. After some time, if the health factor drops below 1, then liquidation will take place, and SD would be recovered using the remaining ETH deposit.
Scenario 3: Node getting liquidated after the health factor drops to 1 or below 1
Assumption: The operator is running 1 node - 1 validator. The SD collateral is completely utilized from the Utility Pool, and the Health factor is below 1.
In this case, the node can be liquidated by anyone; this will be a public function and can be called by anyone.
Note: The same logic will apply to a node operator with more than one validator. The greater the number of validators, the higher the collateral in the form of ETH deposit. The Health Factor will be calculated accordingly.
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